Mellanox shrugs off Intel's InfiniBand buy

Turns in good Q4, will grow in 2012 despite price cuts

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Having bought rival Voltaire, Mellanox Technologies has pretty much ruled the InfiniBand adapter and switching roost for the past several years. But this week Intel shelled out $125m to acquire the InfiniBand chip, adapter, and switch businesses from QLogic, and the big question now is: what does this mean for Mellanox?

Mellanox sells hybrid Ethernet-InfiniBand ConnectX adapter cards and chips for server links, and has also created the SwitchX switch-hitting ASIC, which can do Ethernet or InfiniBand today and eventually both at the same time.

Mellanox wants to expand its share of the networking racket that's focused on high performance computing, cloud, database clustering, and business analytics, and it bought Voltaire to move into Ethernet so it could tag-team data centers with both network protocols on one set of iron. The idea is to cut development and manufacturing costs, and drop prices – as Mellanox did this week on the same day that Intel bought the QLogic InfiniBand biz – and make it up in volume.

There's nothing stopping Intel from pulling the same maneuver, of course, now that it will have plenty of switch engineers on the payroll with deep expertise in Ethernet and InfiniBand. Intel has given no indication of what its networking aspirations are, and this thought did not occur to the Wall Street moneymen on the earnings call – and Waldman did not go there by himself.

But Wall Street did ask about Intel now being a competitor as well as a partner. Waldman put the best face forward on the situation, as you might expect.

"We like this," Waldman told Wall Street. "We think this is important to the market. I don't think QLogic was very successful with their InfiniBand business, and it is important to have more than one vendor in this market. We think Intel is doing the right thing in terms of supporting InfiniBand and understanding that the market is embracing this technology not just for high performance computing, but for virtualized data centers, clouds, Web 2.0, and so on."

Waldman said that Mellanox believes that 40 per cent or more of the x86 server business in data centers could potentially be using top-speed InfiniBand or Ethernet protocols in the coming years, and added that the company believes that there are something on the order of 11 to 12 million of these high-speed ports on both servers and their matching switches up for grabs.

Mellanox doesn't think the addressable market for ports in the data center will grow that much, but that its ConnectX and SwitchX silicon could get a bigger slice of those ports over time. Hence their price cuts this week on 10GbE adapters and switches.

"We look forward to working closely with Intel to continue to drive InfiniBand and RDMA over converged Ethernet into the market," said Waldman, adding that he believed that Mellanox had a lead of between one and two years over the QLogic technology that Intel has acquired. (QLogic would no doubt dispute this, and did when talking toEl Reg earlier this month.

Mellanox has been in the driver's seat with InfiniBand for years, and has made a credible expansion into Ethernet switching thanks to the Voltaire buy and the SwitchX chips. But it may not take long for Intel to be in the driver's seat unless Mellanox gets some big allies or is acquired, perhaps by Chipzilla rival AMD. IBM, HP, and Oracle, the three biggest buyers of Mellanox' wares, could also be interested.

But in the wake of decent Q4 numbers, a relatively sunny outlook for 2012, and Intel's acquisition of the QLogic InfiniBand biz for maybe five times revenues, the stock of Mellanox shot up to a level that gave the company a market capitalization of $1.26bn. That would be perhaps too pricey given its modest revenue and profit stream, even for such big potential suitors.

By the numbers

In the quarter ended in December, Mellanox posted sales of $72.7m, up 78.6 per cent thanks in large part to the Voltaire acquisition, but also boosted by old-fashioned organic growth. More significantly, Mellanox swing from a $352,000 loss in Q4 2010 to a gain of $4.1m this time around. For the full year, revenues at Mellanox reached $259.3m, up 67.6 per cent. But for the full year, earnings were actually down by 24.9 per cent to just under $10m.

Mellanox CFO Michael Gray said on the call that integrated circuits and adapter boards accounted for 57 per cent of the company's sales in the fourth quarter, with switches accounting for 30 per cent. Software and services made up the remaining revenue streams.

By protocol across IC, adapter, switch, software, and services, 40Gb/sec InfiniBand products (also known as Quad Data Rate or QDR) pushed 50 per cent of the company's overall revenues, down from 53 per cent of sales in the third quarter. Double Data Rate, or DDR InfiniBand products, which run at 20Gb/sec, had a 12 per cent slice of Mellanox sales in the third quarter, but this dropped to 8 per cent in the fourth quarter. 56Gb/sec InfiniBand, also known as Fourteen Data Rate (FDR), were a mere 4 per cent of sales in Q3, but jumped to 14 per cent of total revenues in Q4 as Mellanox took down some big supercomputer cluster deals.

Ethernet products, which are just getting rolling at Mellanox, saw a 52 per cent revenue spike in Q4 and now account for 14 per cent of overall sales. It is not clear how Mellanox is reckoning revenue for devices that can run both protocols, but this gives you an idea of what's growing and what's shrinking.

During Q4, Mellanox had two customers that accounted for more than 10 per cent of its sales – and when that happens, the US Securities and Exchange Commission says you have to tell investors. Combined, these two vendors accounted for 39 per cent of total revenues booked by Mellanox. And no, it was not Oracle, which holds a 10.2 per cent stake in Mellanox. HP accounted for 20 per cent of total sales at Mellanox, and IBM made up 19 per cent.

Looking ahead to the first quarter of 2012, Gray said that Mellanox had two big supercomputer deals – one in the US and one in Europe – that would contribute $10m to sales. Both deals are based on InfiniBand, and presumably running at FDR speeds, but Mellanox would not say.

Because of these deals, Mellanox will not experience the traditional first quarter swoon that most IT suppliers deal with every year, and instead expects for sales to rise sequentially to between $81m and $82m. And, perhaps more importantly, Waldman told Wall Street that the company would be able to grow sequentially through the year from there.

That's one reason why Mellanox's share price was up by 16.75 per cent as the market neared Thursday's closing bell. ®